Special Report: The end of Apple's iPod era

Posted:
in AAPL Investors edited January 2014
After years of serving as Apple's main source of revenue, the iPod's influence on the company's financial health has diminished to the point of being effectively irrelevant as a revenue driver, marking an end to the 'iPod era.'



As the halo effect of the iPod reached its maximum potential, reinvigorated Macintosh sales and deep market penetration by the iPhone have completely taken over as the main source of Apple's revenue and earnings. Â*Even the iPad in its inaugural quarter will post more revenue and earnings than the iPod, pushing the device to Apple's 4th largest source of income. Â*What's more, the iPod as a percentage of Apple's total revenue will drop below 10% in 2011.



A few years ago, I wrote an article detailing the iPodÂ?s diminishing importance to AppleÂ?s revenue growth. As Macintosh sales starting picking up steam, and as the advent of the iPhone assumed the helm of AppleÂ?s future growth prospects, the iPod started a slow descent down from its throne as AppleÂ?s key revenue driver.



In January 2006, when Apple hit all time highs of $86.40, I remember how investors and financial analysts feared AppleÂ?s best years were behind it. This fear, while apparently unfounded in retrospect, stemmed from the perception that the iPod was near market saturation, and that Apple wouldnÂ?t be able to innovate further. And though the market was in the midst of a raging bull market, investors saw AppleÂ?s share price drop from $86.40 to $50.00 by that July.



Turn the page to 2010, the iPod is a mere afterthought and Apple has since seen its share price grow almost 6 fold. And while the iPod demonstrated a lot more resilience than anticipated by the financial world, posting record quarter after record quarter through 2008, its significance as a revenue driver has now diminished to the point of being almost irrelevant to AppleÂ?s overall growth. In Q1 2006, the iPod accounted for an astonishing 55.55% -- or more than half -- of AppleÂ?s total revenue.



For the 2010 holiday shopping season, though the iPod posted 250% more revenue than it did in 2006, it only accounted for 21.62% or just a fifth of AppleÂ?s total revenue. That right there is a very tangible example of AppleÂ?s ability to innovate in the face of an inevitable and impending slowdown of its main revenue driver, the iPod. The chart below details iPod revenue as a percentage of AppleÂ?s total revenue from 2006 through 2010. Please note that Q3 and Q4 of 2010 are merely estimates based on a detail analysis IÂ?ve published, and that actual results may vary.







Notice how the iPodÂ?s impact to AppleÂ?s total revenue has been on a consistent and continual downtrend since 2006. It is as if the importance of the iPod wanes by the day. In fact, IÂ?m projecting that the iPod as a percentage of AppleÂ?s overall revenue will fall under 10% for the first time in Q4 of this year. And to get an idea of just how significant that really is, IÂ?m expecting iTunes to account for 6.9% of total revenue in the same quarter. ThatÂ?s an indication that the iPod is becoming just as insignificant of a revenue driver as is iTunes.



Yet, the chart above is even more impressive when one makes a side by side comparison to AppleÂ?s total revenue in the same period. Even though the iPod has a diminishing impact on AppleÂ?s total sales from 2006 to present, AppleÂ?s revenue has outright exploded.



In Q1 2006, Apple reported $5.75 billion in revenue of which 55% were iPod sales. In 2010, Apple reported $15.7 billion or almost triple what it reported in 2006. Yet iPod sales only accounted for a meager 21.6% of that revenue. Any way you look at it, Apple is no longer dependent on the iPod, and any future signs of weakness should produce nothing more than a yawn. The chart below is a quarterly overview of AppleÂ?s revenue from 2006 to 2010. Please be advised that Q3 and Q4 are merely projections, and that actual results may vary. A detailed look at how I arrived at those estimates can be found here.







Though the iPod is contributing less in terms of percentages, it still makes very hefty contributions in terms of revenue. In fact, while iPod revenue as a percentage of AppleÂ?s overall revenue has been on a constant decline since 2006, the iPod has posted very consistent revenue throughout that period of time. The only thing that has changed is AppleÂ?s product lineup, and an untouchable capacity to innovate. Hopefully this article puts the old adage, Â?As goes the iPod, so goes the Apple,Â? definitively the rest. Apple isnÂ?t just the iPod maker or the iPhone maker, itÂ?s a money maker. 2010 marks the end of the iPod era.







Andy Zaky is a graduate from the UCLA School of Law, an AppleInsider contributor and the founder and author of Bullish Cross -- an online publication that provides in-depth analysis of Apple's financial health.
«13456

Comments

  • Reply 1 of 115
    bluedjinnbluedjinn Posts: 56member
    I generally agree with your point, but I have to ask: Do your figures and charts above include the iPod TOUCH as well as the iPod Classic, Nano and Shuffle?



    I ask because I'm pretty sure that the iPod Touch makes up a huge portion of the iOS-based device revenue, and that Touch sales are through the roof.



    Now, if you're talking about the NON-iOS based iPods, I agree 100%, but I'd be very surprised if iPod Touch sales/revenue are becoming "irrelevant", as this article would seem to imply. Just wondering...
  • Reply 2 of 115
    macfandavemacfandave Posts: 603member
    This is how accountants defraud people. They show charts and graphs based on arbitrary definitions and half-truths to lie without actually lying.



    iPhones ARE iPods. iPads are less so, although they do have iPods built in to them.



    Considering iPod hardware as a standalone entity is also kind of crazy. The real success was the iPod/iTunes Store ecosystem that really made Apple's solution much more compelling than any of the myriad combinations of me-too hardware and clunky online distribution networks. The iTunes Store is doing brilliantly.



    The fact that products that are only iPods are fading is in no way, shape or form that it is dying. It is merely testament that Apple has pushed iPod-related technologies so far that the extended functionality of making phone calls or of being put into a tablet with no moving parts have become the successful children of the venerable device.
  • Reply 3 of 115
    nyteskynytesky Posts: 16member
    I love reading AppleInsider because it feels more like informed journalism and less like off-the-cuff blogging. I also read the too infrequent postings Bullish Cross. It is great to see Andy Zaky writing Apple financial analysis for AppleInsider now. A great match! Looking forward to more.
  • Reply 4 of 115
    bluedjinnbluedjinn Posts: 56member
    Quote:
    Originally Posted by macFanDave View Post


    This is how accountants defraud people. They show charts and graphs based on arbitrary definitions and half-truths to lie without actually lying.



    iPhones ARE iPods. iPads are less so, although they do have iPods built in to them.



    Considering iPod hardware as a standalone entity is also kind of crazy. The real success was the iPod/iTunes Store ecosystem that really made Apple's solution much more compelling than any of the myriad combinations of me-too hardware and clunky online distribution networks. The iTunes Store is doing brilliantly.



    The fact that products that are only iPods are fading is in no way, shape or form that it is dying. It is merely testament that Apple has pushed iPod-related technologies so far that the extended functionality of making phone calls or of being put into a tablet with no moving parts have become the successful children of the venerable device.



    Well said, although I think it's a bit harsh to accuse him of being dishonest here; I'm just trying to clarify what his point was.



    You said it better than I did, however; yes, of course the iPhone is *also* an iPod, as is the iPod Touch. I *assume* that what he's referring to is the "iPod-only" lines, which include the Classic, Nano and Shuffle.
  • Reply 5 of 115
    I think the reality is that Apple got too good at shilling its own products. Innovating at the pace they did - nearly redesigning the unit every year - meant that most people (in the demographic) now own 1 or 2 iPods, some even more. (I've owned 4 myself, because I needed to replace broken models, and I given a few others as gifts.) At this point, there just isn't really an impetus for most users to plunk down $200 for a new iPod... particularly when they already have one that does nearly the same thing. I mean, there's only so many ways to play and store music and, therefore, only so many ways that the company can innovate.



    In that light, I'm really curious to see how they treat the Nano this year. It can't get a much bigger screen or smaller form factor without removing the clickwheel altogether. With the addition of FM radio and a camera in the last rev, it addresses nearly every feasible customer request for a unit of that size. A larger capacity would be helpful, but that's tied more to memory prices than anything that Apple's able to control.



    If you take a look at the iPhone, it suggests a bit where their brain is at and what we might see from future handhelds, the iPod included. They've managed to innovate that at a staggering pace, because an iPhone is really more like a small computer and thus has room for more bells and whistles. At the very least, they'll probably always be able to give it moderate speed increases, which is enough to get some consumers coming back indefinitely. With an iPod, no such road exists (I really don't want to hear my music played back any faster, thanks.) What we'll probably see, then, is more attention devoted to the iPod touch, which addresses a market directly between casual iPod users and hardcore iPhone users. (Think: Your 12 year old kid.) Apple will be able to innovate there on a pace comparative with the iPhone, and so shouldn't encounter the same the one-trick pony

    problem it has with it's dedicated music/video players.



    Whatever happens, they've sold a lot of iPods, so even if this is the end it's been a good ride.
  • Reply 6 of 115
    8corewhore8corewhore Posts: 833member
    A friend asked me if he should get a iPod nano. I told him spend a tiny bit more and get an iPhone 4.
  • Reply 7 of 115
    swingeswinge Posts: 108member
    Quote:
    Originally Posted by AppleInsider View Post


    For the 2010 holiday shopping season, though the iPod posted 250% more revenue than it did in 2006, it only accounted for 21.62% or just a fifth of Apple’s total revenue. That right there is a very tangible example of Apple’s ability to innovate in the face of an inevitable and impending slowdown of its main revenue driver, the iPod.



    I thought that paragraph was the most interesting... If Apple is selling two and half times as many iPods now as they did in 2006, I don't think you can call that a slow down at all. In the last few years Apple has seen explosive growth...Clearly products like the iPhone, iPad and Mac lines are leading that growth and represent the vast majority of Apple's total revenue. As these new products emerge, the percentage of sales generated by the iPod shrinks.



    I'm an iPhone devotee, but many of my friends have an iPod touch just because of phone company contracts...The Touch was a brilliant product because it opened up the App Store to so many more costumers and helped spread iOS. I'd also love to see Apple continue to explore low-cost, shuffle-type devices.... I think there will continue to be a market for low cost music players for a long time to come.
  • Reply 8 of 115
    pg4gpg4g Posts: 383member
    I don't believe the iPod died at all, or is even waning. The iPhone is the iPod, evolved. Apple realized that people had two devices and one resource they all wanted: a phone, an iPod, and the Internet. iPod itself evolved. It went from a 5GB brick to a slimline movie player. But instead of striving for smallness, Apple needed to focus on balancing their new movies with their size, and adding in that functionality of phone and Internet. Internet required a touchscreen for efficiency and the phone was formed around both of these. It's a natural design progression.



    What will be interesting is how Apple position iPods now considering their lack of importance in the scheme of things.



    I personally hope the iPod classic and iPod Nano are merged into iPod. iPod and iPod Touch. Simple. (let's just ignore the candy stick iPod shuffle...) Apple may want to now refocus their lines because there would be too much R&D, and tbh it's now a confusing mess of products and features.
  • Reply 9 of 115
    lee1977lee1977 Posts: 11member
    I am on my third Ipod I have only upgraded each time due to a requiremnt for extra storage as I am at about 100gb of music my hope is that they keep updating the classic with more storage as I use it as my main music player at home and have not bought a CD for at least 3 years.
  • Reply 10 of 115
    nasseraenasserae Posts: 3,152member
    Quote:
    Originally Posted by 8CoreWhore View Post


    A friend asked me if he should get a iPod nano. I told him spend a tiny bit more and get an iPhone 4.



    Steve made it clear that the iPhone is there to merge two devices (cell phone and iPod). It is foolish to assume that iPod sales won't go down as a result. However, Apple still win since those who don't buy an iPhone are more likely to buy an iPod than use their phone built in music player. I personally recommend the iPhone and iPod touch when someone ask me what iPod to get.
  • Reply 11 of 115
    paxmanpaxman Posts: 4,518member
    Quote:
    Originally Posted by 8CoreWhore View Post


    A friend asked me if he should get a iPod nano. I told him spend a tiny bit more and get an iPhone 4.



    Not great advice unless he was also in the market for a new phone.
  • Reply 12 of 115
    antkm1antkm1 Posts: 1,441member
    as this study shows, there are a lot of factors that weigh into the success or decline of the iPod. I think part of it is the fact the iPod had changed very little since 2006. My personal history of iPod purchases has been:



    2005 - Ipod shuffle (getting my feet wet into the Apple way of life)

    2006 - iPod Mini 16gig(purchased on ebay for $200)

    2008 - iPod Classic 80gig (wanted my entire music library at a blink of an eye)

    2008 - iPhone 3g 16gig (still have my iPod Classic, don't need the phone to do everything)



    I see no date in mind to replace my Classic iPod. It's my music server for home, office, car, and travel. And i think that's all it needs to be. the iPod Touch doesn't work at a device for the car, and most car stereos suck at reproducing the UI of the iPod classic, so how can you make that any better? Personally, I don't need an All-in-One deive taht does everything i need. This formula works for me, and probably a lot of other people as well. My hope is that they increase the storage of the Nano to 64gig or better. I love my iPod Classic, but would love a smaller form factor...throw in the iTunes store, wifi for updates to podcasts, keep the wheel and you'd have probably the final iteration and all I'd ever need.
  • Reply 13 of 115
    chronsterchronster Posts: 1,894member
    Off topic: I bought my mom an iPod last Christmas and she lost it. I'm ticked.



    My little brother likes the ipod touch I bought him though.
  • Reply 14 of 115
    ghostface147ghostface147 Posts: 1,629member
    I haven't bought a new iPod in several years. If one dies, i get on ebay and get on old one a few generations back. Works fine for me.
  • Reply 15 of 115
    The advent of the iPhone changes the equation entirely: my SO switched from Palm on Verizon to iPhone in Feb when her iPod got wonky. She realized that she could replace her iPod w/ an new one - w/ 2x storage - and get the phone part for free....



    I don't predict the end of the non-touch/non-phone iPod quite yet, though: shuffles and nanos and classics are still more compelling for some than the "new iPod + free fone", and this will remain so (though tailing off) for the next 3-5 years.



    Like plenty of folx I'm a bit disappointed that iP4 didn't jump to 64/128, but that turns out to be a limitation of the current A4. It will no doubt change soon enough. iP4 will be my first iPhone (and my 3rd & most capacious iPod), and I'll be very surprised if my next has less than 128.
  • Reply 16 of 115
    anantksundaramanantksundaram Posts: 18,354member
    Just got myself the 160gb classic. I figured I'd better get it before it's discontinued, since I need it as the music source for my car. Will probably stand me in good stead for a few more years. The Touch and the iPhone are way too dainty for that use.
  • Reply 17 of 115
    jerseymacjerseymac Posts: 408member
    Hope they keep the classic. Love the storage capacity.
  • Reply 18 of 115
    antkm1antkm1 Posts: 1,441member
    heck, do any of you remember how long you had your walkman, your portable CD player?

    my first Walkman that lasted me about 9 years (which it did overlapp my purchasing a CD player). I purchased my first CD player (Sony D-9) in 1989 and had to replace it in 1998. Then my second in 1998 that lasted me until i purchased my first iPod Shuffle in 2005, and it still works today, if i needed it in a pinch.



    I think the portable device market has been too focused no getting something new out every year, then telling companies (and consumers) they have FAILED if they haven't sold as many (or replaced your device) every YEAR. That's just insane!
  • Reply 19 of 115
    antkm1antkm1 Posts: 1,441member
    Quote:
    Originally Posted by 8CoreWhore View Post


    A friend asked me if he should get a iPod nano. I told him spend a tiny bit more and get an iPhone 4.



    yeah, and he'd have to charge the thing every 4 hours if she used it heavily. I honestly tried to use my iPHone as the All-in-One device it's supposed to be. But the user-interface in the car sucks a big one. The battery life is abysmal at best (especially if you're traveling by plane or someplace you can't charge it easily). Just not a practical music device. Heck, i even download TV shows and transfer movies to my ipod classic if i'm on a plane just because the battery on that is so much better. There is an occasion i'll listen to NPR on their App or download a podcast when i've left my ipod in the car, but the iPhone/Touch just doesn't work for music.
  • Reply 20 of 115
    cincyteecincytee Posts: 218member
    Quote:
    Originally Posted by 8CoreWhore View Post


    A friend asked me if he should get a iPod nano. I told him spend a tiny bit more and get an iPhone 4.



    An iPhone won't be a tiny bit more -- especially not after AT&T is through with him. The appropriate recommendation is an iPod Touch: most of the iPhone's goodies without the monthly bill.
Sign In or Register to comment.